Forex or the foreign exchange market is the trade in buying and selling of foreign exchange. It's an OTC market or an over the counter market where currencies are always traded in pairs. This means that USD would be sold to buy Japanese Yen or Swiss Francs would be bought and Euros sold consecutively. The forex market has no centralized exchange and is solely conducted through the phone and the electronic medium including the internet.

24 hour market

It's truly a 24 hour market that opens in Sydney and end in New York. The trade opens in the following manner, Sydney, Tokyo, Singapore, Hong Kong, Frankfurt, London and then New York. These are the major markets where the forex is traded. Of course those who have access to internet and the forex trading software can also do it sitting in front of the computer wherever they may be.

The daily turnover of the forex trade touches $3.2 trillion. 85% of the trade in done in the major currencies which are the US$, the Japanese ¥, British £, the €, Swiss CHF , CAD and the AUD. While 5% of the trade is used for buying and selling products and services in various countries by the multinationals, 95% of the trade is done for speculation and by government for correcting the currency and other domestic pressures.

The base currency and cross currency trade

The first currency is always known as the base currency and its value is always 1. This means that when forex quotes are given for example USD/JPY - 110.10, this means that 1 USD is equal to 110.10 JPY. Similarly when EUR/CHF rates are given, this means that Euro is the base currency and so on. When there is arising quote, this means that the base currency is appreciating against the other currency. Vice versa the opposite is also true.

Since US$ is considered usually as the base currencies, trades that don't involve the US$ are known as cross currency trade. This means that EUR/CHF trades are cross currency trades. To buy and sell the currencies, there are two quotes "The BID rate and the ASK rate".

Doing the transactions

"Bid" is the price at which you can sell the base currency while simultaneously buying the other currency.

"Ask" is the price at which you can buy the base currency while simultaneously selling the other currency.

The profit and the loss is calculated as the spread between the bid and the ask prices. Taking the example of EUD/USD. If the bid/ask price is 1.4600/1.4616. This means that you can sell 1 Euro for USD 1.4600 or buy 1 Euro by selling USD 1.4616. If you think that the dollar will depreciate as given with the oil price surge and the Euro will increase, then you buy the Euros and sell the dollars.

As you had expected the Euros have increased and the Bid/Ask price is now 1.4900/1.4600. Considering that you had bought 100,000 Euros by paying USD 146,160. Now you sell the 100,000 Euros at 149,000 USD. This means you have made a clear profit of USD 2840.